Cambridge Business Association
Trading Options at Expiration
Book

Trading Options at Expiration

Strategies and Models for Winning the Endgame

Jeff Augen
FT Press, 2009
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Editorial Rating

8

Qualities

  • Innovative
  • Applicable

Recommendation

Investors commonly use pricing models and formulas to determine the fair value of call options to buy stock and put options to sell stock. But formulaic fair value does not account for all the pricing dynamics that affect options near their expiration dates. That is why the price of an expiring option often diverges from its fair value. This pattern of distorted pricing creates trading opportunities in the options market that are less risky and potentially more rewarding than holding the underlying stock over the long term. Jeff Augen’s compact, focused book details strategies for trading options on the third Thursday and Friday of each month, before the options expire that Saturday. He cautions that investors must be aware of collateral funding needs, regulatory requirements, investment minimums and other sophisticated details. Because Augen assumes that the reader has substantial background knowledge, professional traders may have the most to gain from his mathematically rigorous insights. getAbstract, which recommends books, but not investments (the opinions in the summary are those of the author), also suggests this book to amateur investors who are familiar with options and seek the next level of professional information.

Summary

Options, Investment Risk and Price Distortion

Recent history shows that trading in the United States’ options markets one or two days each month is less risky than full-time exposure to slumps in the stock market. In 2008, U.S. stock market values crashed to 1997 levels as a worldwide credit crisis unfolded, inspiring a stock selling spree. The market collapse shows the danger of clinging to stocks for the long term, because inflation, devaluation and other costs add to the absolute fall in value.

Trading options entails risk even if you trade only on a few pivotal days each month. The price of an option to buy or sell stock, like the price of the underlying stock, is subject to sudden surges and slumps. The underlying stock price is a major determinant of the price of an option to buy or sell the stock. The expiration date and the strike price (the price at which a trader exercises the option) are also determinants. Traders typically buy and sell options without exercising them.

News about a public company can move its stock price and the price of options to buy or sell that stock. This is especially true when a company announces quarterly financial results ...

About the Author

Jeff Augen is a private investor and an expert on information technology. He is an instructor at the New York Institute of Finance and the author of The Option Trader’s Workbook, The Volatility Edge in Options Trading and Bioinformatics in the Post-Genomic Era.

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